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RBNZ Says Rate-Cut Chances Have Increased on Weaker Growth

(Bloomberg) -- New Zealand’s central bank said the chances of an interest-rate cut have increased and it will be watching growth data closely to see whether an expected pickup materializes.

“We’ve been pushed nearer to that trigger point” of cutting rates, Reserve Bank Assistant Governor John McDermott said in an interview Thursday in Wellington. “We’re putting a stake in the sand here and saying we expect growth to accelerate” in the third quarter. If it doesn’t “that means we’ve got something wrong and we’re going to have to reconsider where we’re at,” he said.

The RBNZ earlier held its official cash rate at a record-low 1.75 percent and surprised economists and investors by pushing out its forecast for a hike to late 2020, a year later than it projected just three months ago. It cited weaker growth and the risk that a slump in business confidence could hamper investment.

“Animal spirits in an economy matter,” McDermott said. “It is possible to talk yourself into a recession. You can generate self-fulfilling expectations, we recognize that. The more that happens, the more we’ll try and lean against that. The economic fundamentals say it should be okay, but there’s a psychological problem that sits there.”

Yield Curve Concern

The New Zealand dollar fell three quarters of a U.S. cent on the RBNZ’s looser stance and swap rates dropped. Both extended their declines on McDermott’s comments, the kiwi falling a further quarter cent to 66.52 cents, the lowest in two and a half years, and the two-year swap rate dropping to 2 percent, its lowest since September 2016.

McDermott said the RBNZ was happy with the kiwi dollar’s depreciation in recent months, but was concerned that the yield curve was building in expectations for a monetary tightening. It wanted markets to understand that a rate increase was “off the table for the foreseeable future.”

“We need that yield curve down here,” he said. “You guys are starting to anticipate something that we don’t think is warranted.”

In current circumstances, the bank would need to see core inflation above 2 percent before it considered raising rates, he said. The RBNZ’s sectoral factor model of core inflation is currently at 1.7 percent.

McDermott, who is the RBNZ’s chief economist, said the bank would be happy to look through headline inflation above 2 percent, the midpoint of its 1-3 percent target range. “That’s not going to spook us. We need sustained trend increases. We really need to see that core inflation start to move,” he said.

Third-Quarter GDP

Annual growth slowed to 2.7 percent in the first quarter. That’s below the economy’s potential rate, which McDermott said was about 3 percent. The RBNZ expects the growth rate to dip further to 2.3 percent in the second quarter before recovering to 2.5 percent in the third.

Third-quarter GDP data are due on Dec. 20.

“In the September quarter we’re expecting things to be more back to normal, the fiscal policy starting to get some traction at that point, the net exports to start picking up,” McDermott said. “If we don’t hit that one, it’s like oh, have we got it wrong? That will be a real test.”